The Danger of Complacency

Someone posted a quote on ET a few months ago that I keep in front of me at all times:

âBeing disciplined in the past isnât good enough: on each and every trade you must be disciplined. Forever. Like a drunk in a program you can NEVER slip off the wagon.â

I still fall prey to complacency, but more rarely and I catch myself a lot more quickly now.

To be complacent is be unconcerned and free of worry. I believe it's important that trading be as stress-free as possible, and discovering a certain "edge" that works most of the time certainly helps place you in that state of mind.

The quote above is critical to long-term profitability and survival as a trader.

I've been set back hugely several times since I began trading just over a year and a half ago, each time because of complacency.

My entry into trading was marked by fantastic success, with a 23% ROI in less than 3 months on my trading account alone. I made 40% in my IRA. It was a bull run off the January 2008 selloff that ran all the way into the late spring. I bought stocks and options on stocks that fell hard on news and captured nice profits from the rebound.

I never used stops because it didn't occur to me that you needed to. Any good company whose stock dropped a lot always bounced back at least part of the way, so why bother with stops?

This complacency set me up for large losses during the bear market from late August through November, and I gave back my profits and more.

I became far more careful in my trading and learned to short instead of strictly playing the long side. I began to be profitable again in November. I continued to trade profitably during the first quarter of this year, gaining nearly 34% by doing the opposite of what I did when I started: I shorted stocks that were making new 52-week highs.

Ironically, because of the tremendous success I had, I quit using stops and quit worrying if the position ran against me because these high flyers always pulled back.

Complacency again. Total confidence, not a worry in the world even on those rare occasions when price didn't pull back until after quite a draw down.

Then some large losses again, when I realized that just as stocks can keep on falling in a bear market, they can keep on rising in a bear market rally.

I gave up 37% of my 1st quarter profits in just one month. Yes, those losses would've eventually turned into profits, but why endure such a drawdown and take such huge risk when you can use stops to get out of a trade that turns against you, and either take the other side of the trade or wait for another entry zone to be reached in the same direction?

The result of these experiences has been both positive and negative.

The positive is that I now put in a disaster stop on every trade the moment the trade is on. This is the maximum loss I'm willing to take on the trade, period. This guards against sudden violent moves (as an example, when MTXX dropped from $19 to $6 in just a few minutes on 6/16), and it ensures that if for some reason I violate my mental stop (which is generally a close stop based on a price level that invalidates the trade) I have a hard stop in place to protect me against a possible moment of trader insanity, which can happen at any time.

The negatives are that I'm trading very small size now to keep my risk low, and I "over think" setups quite often and miss good trades by hesitating. The negatives are mainly psychological issues.

I know how to trade well, but two bouts of great success followed by complacency and large losses have left me a lesser trader, though far better at managing risk.

So I offer this most critical advice to newbies so you can hopefully avoid the trading demons I now struggle to eliminate:

âBeing disciplined in the past isnât good enough: on each and every trade you must be disciplined. Forever. Like a drunk in a program you can NEVER slip off the wagon.â

Someone posted a quote on ET a few months ago that I keep in front of me at all times:

âBeing disciplined in the past isnât good enough: on each and every trade you must be disciplined. Forever. Like a drunk in a program you can NEVER slip off the wagon.â

I still fall prey to complacency, but more rarely and I catch myself a lot more quickly now.

To be complacent is be unconcerned and free of worry. I believe it's important that trading be as stress-free as possible, and discovering a certain "edge" that works most of the time certainly helps place you in that state of mind.

The quote above is critical to long-term profitability and survival as a trader.

I've been set back hugely several times since I began trading just over a year and a half ago, each time because of complacency.

My entry into trading was marked by fantastic success, with a 23% ROI in less than 3 months on my trading account alone. I made 40% in my IRA. It was a bull run off the January 2008 selloff that ran all the way into the late spring. I bought stocks and options on stocks that fell hard on news and captured nice profits from the rebound.

I never used stops because it didn't occur to me that you needed to. Any good company whose stock dropped a lot always bounced back at least part of the way, so why bother with stops?

This complacency set me up for large losses during the bear market from late August through November, and I gave back my profits and more.

I became far more careful in my trading and learned to short instead of strictly playing the long side. I began to be profitable again in November. I continued to trade profitably during the first quarter of this year, gaining nearly 34% by doing the opposite of what I did when I started: I shorted stocks that were making new 52-week highs.

Ironically, because of the tremendous success I had, I quit using stops and quit worrying if the position ran against me because these high flyers always pulled back.

Complacency again. Total confidence, not a worry in the world even on those rare occasions when price didn't pull back until after quite a draw down.

Then some large losses again, when I realized that just as stocks can keep on falling in a bear market, they can keep on rising in a bear market rally.

I gave up 37% of my 1st quarter profits in just one month. Yes, those losses would've eventually turned into profits, but why endure such a drawdown and take such huge risk when you can use stops to get out of a trade that turns against you, and either take the other side of the trade or wait for another entry zone to be reached in the same direction?

The result of these experiences has been both positive and negative.

The positive is that I now put in a disaster stop on every trade the moment the trade is on. This is the maximum loss I'm willing to take on the trade, period. This guards against sudden violent moves (as an example, when MTXX dropped from $19 to $6 in just a few minutes on 6/16), and it ensures that if for some reason I violate my mental stop (which is generally a close stop based on a price level that invalidates the trade) I have a hard stop in place to protect me against a possible moment of trader insanity, which can happen at any time.

The negatives are that I'm trading very small size now to keep my risk low, and I "over think" setups quite often and miss good trades by hesitating. The negatives are mainly psychological issues.

I know how to trade well, but two bouts of great success followed by complacency and large losses have left me a lesser trader, though far better at managing risk.

So I offer this most critical advice to newbies so you can hopefully avoid the trading demons I now struggle to eliminate:

âBeing disciplined in the past isnât good enough: on each and every trade you must be disciplined. Forever. Like a drunk in a program you can NEVER slip off the wagon.â

More...

Since this is a PSYCHOLOGY thread, I would like to comment.

First, many CONFUSE discipline with structure.

This is fairly common and it the basis of most HORRENDOUS parenting.

Discipline is not achieved by MORE STRUCTURE.

If it were the ASSHOLES in our GUBMINT would have the nation going in the right direction.

Most TRUTH is paradoxical. We are nations of lots of LAWS and lots of LAWYERS and yet we are a lawless nation.

LEGALISM has NEVER worked in any GUBMINT or any CHURCH.

I NEVER use stops. My goal is to exit before I get to stops. So I leave a lot a money on the table, which for the most part is FOOL's Gold.

I ALWAYS have a LOSS limit in my mind for the day not ONE trade.

Discipline is not being so pychologically obssessed that you believe that you have to be in the market every minute.

Discipline is being PSYCHOLOGICALLY prepared for a stock or an entire market to go AGAINST your position.

I must question if the profitable trader is built on ARBITRARY STRUCTURE.

I have not yet taken a life, it is not because our legal structure has imposed laws against murder.

It was because the profit of taking another's life never seemed to outweigh the risks.

The question involves universal truth and is come down through the ages and is more pychological and philosophical than practical.

Sophocles based his playAntigone on the question.

Is man so degenerate that he cannot prosper without the impostion of the extrinsic structure of rules, regulations, and laws?

Discipline is really the willingness to lose money or the attitude that you can accept responsibility for the risk your taking.

However! Structure is the way you go about fulfilling your responsibility and structure is only used when you do decide to take responsibility. Structure is in a sense useless without a man who can do it without the need of structure.

Don't get me wrong structure organizes, but a man's discipline is what solidifies the way things are organized for you. Whether good or bad.